What is not ‘service’ [Explanation to section 65B(44)]
The word service has been defined for the first time in Finance Act ,2012 under section 65B (44 ).It is an exhaustive definition and covers all the activities except the one excluded from the purview of service.
Exclusions from definition of ‘service ‘are-
(A ) (I ) Transfer of tittle in land ,things attached to the earth or permanently fastened to anything attached to the earth cannot be considered as service.
(ii ) Transactions only in money cannot be considered as service .Dividends, loans, advances, deposits, repos, reverse repos ,share of profit are mere transactions in money but bank charges ,LC charges ,Bank guarantee charges ,Loan processing fees, cheque collection fees ,currency conversion charges ,credit card charges etc. are not not mere transactions in money and hence liable foe service tax.
(iii) A claim to any debt (other than a debt secured by mortgage of IP or by hypothecation or pledge of MP ) or to any beneficial interest in MP not in the possession .
(iv ) Transfer of title in goods (includes ‘securities’).Hence sale/purchase of securities like shares, derivatives etc. not taxable. Similarly Forward contracts ,Future contracts is not taxable.
In turnkey contracts, the service elements in nature of advise ,consultancy or technical assistance is liable for service tax as they form ‘taxable services’ under the Finance Act,1994.
It is to be noted that Article 366(29-A )(b) to the constitution has allowed the vivisection of indivisible contracts in order to find out goods component and value thereof. Therefore ,the remnant part of the contract may be attributable to the scope of service tax under the provisions of Finance Act,1994.
(v) Transfer of goods (i.e. deemed sale )
Transfer of rights to use goods is necessary for deemed sale as per Article 366 (29A)(d) of Constitution and when goods not transferred as such, question of deeming sale of goods does not arise.
In a case before the Madras High Court in Infotech Software Dealers Association (ISODA) vs. UOI [2010]20 STR289 (Mad) , The court observed that there may be the cases of exclusive sale ,exclusive service or where the element of sales and service both are involved ,the nature of transaction and the dominant intention of parties are significant for determining the levy of tax i.e. whether sales tax or service tax.
It has been settled in the SC ruling in TCS case [2004]178 ELT22 (SC) that softwares ( branded as well as unbranded ) is goods ,there is no element of service ,and hence service tax cannot be levied.
Hence , selling of information technology software as multiple user/Internet download; retaining the copyright with seller /Shrink wrap softwaere etc and sold in terms of end user license agreement(EULA) ,the contract is given for customized development of software delivered online or downloaded on the Internet is a service not sale and such transactions are liable for service tax in as much as the developer retains the copyright of software and the software was as such not sold by developer as per EULA ,but only the contents of the data stored in the software were sold which would amount to service only.
(B) No service tax will attract if the services provided by the employee to the employer but services rendered by the employee not in the course of employment shall attract ST e.g. A WTD or an ED is generally regarded as the employee of the company .However , ID ,ND OR NED cannot be regarded as the employee of the company. Hence , activities carried by them (like ID,ND or NED ) for consideration are not excluded from the definition of service . Accordingly remuneration paid to ID ,ND or NED shall be liable to service tax.
Expl.-1- Service by MLA/MP/MC/Hold any post in pursuance of constitution or as chairperson/member/director in a body established by CG or SG or Local Authority not treated as service.
Expl.-2- A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory.
(C) Fees taken in any court or tribunal.
The definition under section 65B (44) highlights the following important points –
- To constitute service there should be an immediate and not remote connection between activity and consideration. Consideration may actually be payable at a later point of time but linkages should be immediate. Based on this concept, (i) Awards received in consideration for a life time contribution like Nobel Prize is not service. (ii) Free seminars to educate about prudent investment indirectly promoting Mutual Fund is not service in absence of a direct link between activity and consideration (iii) Services received from Governments against taxes paid like property tax is not service because direct link between activity and consideration is missing although a casual link is always presumed.
(i) Activities without consideration do not attract service tax like free services provided , imposition of fines and penalties for violation of a provision of law being legal consequences of a person’s actions are not in the nature of consideration for an activity ,security deposit that is returnable on completion of provision of service etc.
(ii) Payments without an activity also do not attract service tax like Reward, alimony for divorce, gift (which has not been given in terms of reciprocity), Grant of pocket money.
(iii ) Non –Monetary consideration means compensation in kind such as supply of goods or services in return for provision of services, refraining or forbearing to do an act in return for provision of a service tolerating an act or a situation in return for provision of a service ,doing or agreeing to do an act in return for provision of service.
(iv) Services provided by a person to self are outside the ambit of service tax like a service provided by one branch of a company to another or to its head office is not taxable service but exceptions are-
(a) An establishment of a person located in taxable territory and another establishment of such person located in non- taxable territory.
(b ) An unincorporated association or a body of persons as the case may be ,and a member thereof shall be treated as distinct persons.
In short, Service tax liability arises to pay only if DOING ANY ACTIVITY FOR CONSIDERATION NOT FALLING UNDER IMAGE, Negative List and Exemption List.